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How to pay down credit card debt on your own

Despite changing consumer spending habits in the wake of a rough economy, and new consumer protection legislation, credit card debt still plagues American consumers. Nearly 47 percent of households carry credit card debt. The average debt balance is a whopping $15,325 as of July 2012. Yet it is still possible to pay down your own credit card debt. You’ll need to understand the ways to do so, choose a system that works for you, and use it consistently. Here are some dos and don’ts to help you pay down your credit card debt.

Don't

Do

Do prioritize your debts

In the big picture, pay for necessities first. The three big necessities in life are food, clothing, and shelter. This does not mean gourmet dining, a trendy wardrobe, and a mini-mansion. The only one of these three that should involve debt is a mortgage. For that – and any other secured debts – always pay the minimum. (A “secured” debt is a loan that is secured by a tangible asset – such as a car or a home.) If you do not pay these bills on time, you could lose the asset, which – in the case of a car or home – can be devastating.

Do try to pay down debt systematically on your own

Depending on your income, you may be able to pay down debt on your own – before turning to debt settlement, debt consolidation or credit counseling. To pay down your own credit card debt, it is critical to learn to create and use a simple budget. Start today by deciding which of the following two methods to use, and then modify your budget accordingly. It will require strict discipline, belt-tightening, and revision of goals – but it’s what has to happen.

Do choose the “avalanche” or “snowball” method

First, determine a fixed monthly amount you can pay toward your debt until all debts have been paid off. This amount should be more than the combined minimum payments on all of your cards. Then follow either the avalanche or snowball method of paying.

Avalanche—The avalanche method involves paying off debts by starting with the one with the highest interest rate, and working down from there. Make minimum payments on each debt except the one with the highest interest rate. For that, pay the minimum plus any extra you can afford. Repeat this process every month until that debt has been paid off. Then, keep paying the same monthly total – but take every dollar you were using to pay off the highest-interest debt and put that towards paying off the debt with the second-highest interest rate. Keep following this strategy until you’ve cleared away all your debts.

Snowball—The snowball method involves paying off the smallest debt amount first, and working up from there. Pay the minimum on all debts. Then apply any remaining funds from your overall allocated amount toward paying off the debt with the smallest balance. After you pay off that debt, continue paying the same monthly amount you started with. Follow the same strategy as before: Pay the minimum on all debts, but pay all your remaining funds to knock out your second-smallest debt faster. Working on debt elimination this way gives you the most immediate satisfaction.

The snowball method can be more costly than the avalanche method, because you might pay more interest over the long run. But many people find that the success of paying down small debts helps motivate them to stick to the plan of paying down all debts.

Do negotiate

As you work to pay down your debt, you also can try calling creditors and asking for temporary hardship status. Some creditors may work out payment plans if you have had a true temporary hardship. For instance, if you lost your job but now have a new one, and you’ve previously paid your bills, they might give you a break.

Don't

Do not automatically jump to credit counseling

Most people do not understand credit counseling. Credit counseling, in many if not most cases, is not non-profit. In addition, credit counseling reduces interest rates only, not principal balances due. Credit counseling agencies set consumers up with a debt management plan that reduces the monthly payment. These agencies can do this because they have pre-arranged agreements with credit card companies to lower interest rates on existing debt to a creditor-issued "concession rate." For some people – particularly those with very high debt – lowering interest rates may not help that much. If you find that you do need outside help to pay down your credit card debt, other alternatives may be more helpful.

Do not cancel credit card accounts

In an effort to refrain from using credit as they pare down their debt, some people close credit card accounts. Think twice, however, about canceling a credit card with a long (positive) history. The longer you hold a card, the more valuable it is in your credit score determination. While most adults need to carry one credit card for personal business, it is not necessary to use more than one. Use the card with the longest history (assuming you are paying in full each month and interest rates do not apply; otherwise, you will need to find a card with the best rate and use only that) and put the others away. Do not close the accounts. If you need to, freeze the cards, put them in a safety deposit box or store them at your mother’s home.

Do not neglect student loan debt

While paying off credit card debt is one of the best investments you can make, do not neglect any student loan debt in the meantime. Student loan debt never goes away; even in bankruptcy, it cannot be discharged. Many people will find it is most valuable to pay the required monthly payments on student loans, while putting extra money toward paying down high interest credit card debt.

Do not give up

Chances are good that it took some time to accumulate your credit card debt. Likewise, it will take some time to pay it off. It also will require discipline and belt-tightening. The rewards of living without debt, and within your means, are worth it.

Summary

Paying down credit card debt on your own is possible for many people. Instead of feeling overwhelmed, start by creating and using a simple monthly budget. Then choose either the avalanche or snowball method of debt paydown, work into your budget, and go. It will take time and effort, but without credit card debt, you’ll experience far less stress and greater well-being – physical, mental and emotional, not just financial.

Kevin has worked with Freedom Financial Network since 2005. Before that time, he held the position of enrollment sales supervisor for Nationwide Financial Solutions in Tempe, Ariz. Kevin also has worked as a business analyst and customer service...